All Forum Posts by: Mike S.

Quote from @Bryce Jamison:

Keep in mind you may trigger a due on sale clause too. A few years ago with interest rates hovering around 3-4% this was more boogey man advice and hardly ever happened. It takes effort and if a bank was getting paid why bother, but if you have a low interest rate and they can due on sale clause you and make you refinance into a 8% interest rate they may.

Some conventional mortgage clearly accept transfer to an LLC where you are the member without triggering the due on sale clause. Some will not.
You may want to look at using a land trust. If done properly that could avoid the due on sale clause.

You first deed your property to a land trust where you are still the beneficiary. This transfer will not trigger the due on sale clause per the Garn St Germain act. Make sure that you change all your insurance insured name to the land trust.
In a second time, you assign the beneficial interest of the land trust to your LLC. As this transfer is not recorded, your bank will not know about it. In case at some point you need to show who the beneficiary is, you can always reassign to you for a few days and then back to the LLC.

Quote from @Chris Seveney:

@Whitney Hanson Bollinger

You can quitclaim deed it.

Avoid the quit claim deed. Use a warranty (or special warranty) deed to keep the chain of title clear and also possibly keep your title insurance.
Some good videos on that subject here.

In my view Index Universal Life insurance are better suited than whole life when used in conjunction with real estate investment. Personally I am using exclusively IUL for that.

Of course you need a properly set up Whole Life or IUL for maximum cash value.

On the long run, a IUL will have a better IRR than a Whole Life. However the IUL will have much more volatility and some years you can have a 0% gain while other years you can have double digits gains. If you are using the infinite banking concept for regular consumption purchase, you need a policy with steady return as you can not absorb the volatility, so a Whole Life is much more suited for that than an IUL. When you are using high cash value permanent life insurance collateral for investment purpose like real estate, the volatility can be absorbed much easier as you are producing cash flow with your investment. The gain of your life insurance is just the ice on the cake, so you want to maximize the long term IRR. The long term IRR of a properly set up Whole Life policy is in the 3 to 5% range, while you can expect 5 to 8% IRR with an IUL.

A mortgage life insurance is a kind of term life insurance that will pay the remaining balance of your mortgage if you die before the end of the mortgage.

The amount of death benefit decreases every month as your mortgage balance decrease. The amount of premium you pay monthly could be averaged over the total duration of your mortgage or can decrease based on the amount left at risk.

Like most term life insurance, they are usually cheap (if you are reasonably young and have no preexisting medical issue). They rarely pay out (less than 2%) as you are expected to live past its term.

Term life insurance has its place to cover your family if you die early. It is often used to replace your salary for a spouse or to pay for your children expenses until they are old enough to work.

Another kind of insurance is permanent life insurance (the most common today are Whole Life and Index Universal Life). As these insurance are covering your for the totality of your life, they will have to pay eventually a death benefit. So for the life insurance company, compared to a term product where they only pay out 2% of the time, they now have to pay out 100% of the time. It make these products much more expensive to purchase, but on the other end you are sure that your family will benefit from it.

So depending on your financial profile and your needs, it may be advisable in some case not to use any term products but only permanent life insurance instead, or a combination of both.

Instead of foreign registering an LLC in another state, it is often the same price to open a new LLC in that state. Have that LLC owned by your holding LLC. It adds some better protection if your holding LLC is in a strong charging order protection state, and by having different LLC you are limiting your liability exposure to only the content of that LLC. As these local LLC are disregarded for tax purposes, it does not increase your tax reporting burden.

Quote from @Grant T.:

Quote from @Mike S.:

Asset protection is important, and I would say even more when you don't have a lot of asset, as losing the few you have may be devastating.

The often recommended structure for passive real estate is one WY holding LLC that is the sole member of individual LLC in the state where each property is located. The WY LLC has strong charging order protection and anonymity, while each individual LLC insulate each property from each other.

When dealing with flips, each property also would also be in its own LLC for asset protection, but for tax issue, as it become an active business, you would want to have them under a separate holding that would probably be taxed as an S-Corp.

These are the general guidelines. But there are some tweaks depending on the state (like CA where you may want to use a statutory trust instead of an LLC, or Florida where a land trust may be advisable to avoid some transfer taxes, etc...)

Also your specific situation may also trigger some other requirements.

So yes, consulting with an asset protection attorney, who is knowledgeable about real estate and taxes is a must. You can also educate yourself on the subject. I highly recommend the Youtube channel of Clint Coons that is filled with hours of knowledge on thee subject.

Last, some people will tell you you don't need LLC and instead should only use umbrella insurance. Using LLC doesn't negate the need for insurance. But insurance won't protect your asset on some lawsuit.
Other will tell you they have never been sued and so you are worried for nothing. It is like saying because you never had a fire you don't need fire insurance.... It is a matter of personal risk taking behavior. At the end of the day, you have to decide what will make you sleep at night.

I've read it is hard to refinance when your properties are in a trust, is that true? it seems like a Wyoming holding LLC would be my best option.

Lending for non commercial property in LLC or trust is definitely more difficult. Some lenders will work with trust but not LLC, others will deal with LLC but not trust, and some won't deal with any of those.

Quote from @David M.:

@Mike S.

So, this is where I am not sure how this really avoids the CA franchise tax

My understanding is that the trust is totally disregarded for tax purposes and tax liabilities are on the beneficiary.

Your local out of CA properties are owned by separate local LLCs and all these local LLCs are owned by the WY LLC. The WY LLC is owned by the WST and you are the trustee and beneficiary of the WST, living in CA.

So if your WY holding LLC is disregarded for tax purposes (as it should with only one member being the WST), you as the beneficiary of the trust is reporting its income on your tax return.

However, as you are only the beneficiary of the WST that is exempt from the CA franchise fee, and as none of the LLC are doing business in CA and you are not directly involved with them, they are also exempt from the CA franchise fee.

Quote from @David M.:

@Mike S.

Just a layman's point of view, I'm not really liking his approach. He even says its just anonymity 'hiding' that you own the LLC's. So, you aren't declaring what you own because he figures CA can't find out?

At least with his second example, at least he says the "business trust" isn't subject to the franchise tax. I guess the WY LLC provides some lmited liability protection (and anonymity to the trust)? Otherwise, without the limited liablity, its just as good as owning in your own name (yeah, I'm not that big on anonymity).

I guess I don't like playing "smoke and mirrors" with the tax man...

The anonymity part he is talking about is for asset protection, not the CA franchise tax. However he is explaining how to use the WST while keeping asset protection. Anonymity is very important to limit ambulance chaser lawyers. The real asset protection part is coming from the charging order protection from WY LLC. Watch his others video on his Youtube channel, it should go deeper into the process. I remember he also has plenty other videos on CA specific issues.

There are ways to avoid the CA franchise tax for out of state properties by using trusts.

See this video.

Asset protection is important, and I would say even more when you don't have a lot of asset, as losing the few you have may be devastating.

The often recommended structure for passive real estate is one WY holding LLC that is the sole member of individual LLC in the state where each property is located. The WY LLC has strong charging order protection and anonymity, while each individual LLC insulate each property from each other.

When dealing with flips, each property also would also be in its own LLC for asset protection, but for tax issue, as it become an active business, you would want to have them under a separate holding that would probably be taxed as an S-Corp.

These are the general guidelines. But there are some tweaks depending on the state (like CA where you may want to use a statutory trust instead of an LLC, or Florida where a land trust may be advisable to avoid some transfer taxes, etc...)

Also your specific situation may also trigger some other requirements.

So yes, consulting with an asset protection attorney, who is knowledgeable about real estate and taxes is a must. You can also educate yourself on the subject. I highly recommend the Youtube channel of Clint Coons that is filled with hours of knowledge on thee subject.

Last, some people will tell you you don't need LLC and instead should only use umbrella insurance. Using LLC doesn't negate the need for insurance. But insurance won't protect your asset on some lawsuit.
Other will tell you they have never been sued and so you are worried for nothing. It is like saying because you never had a fire you don't need fire insurance.... It is a matter of personal risk taking behavior. At the end of the day, you have to decide what will make you sleep at night.